Even though this new “abnormal” won’t last forever, the effects of the COVID-19 pandemic will be far reaching. Worries about physical and mental health, as well as feelings of insecurity and financial well-being, are rampant. If you’re graduating soon, the uncertainty of employment and even the uncertainty in many areas over whether you can take the bar exam is likely disheartening.
Though we’ve all been hit by the pandemic in different ways, there are financial lessons you can take from current events to help protect you against financial insecurity in the future.
Prioritize an emergency fund
In April, the unemployment rate rose to 14.7 percent, the highest rate since 1939. Recent law school grads have been seeing their employment start dates pushed back until as far as 2021, and some have had employment offers rescinded altogether. When it comes to weathering uncertainty, having enough liquid cash is crucial.
Having a pile of savings in an emergency fund helps to protect you from job or income loss. Financial experts say that after you graduate from law school, you should have three to six months of living expenses in a savings account. This might not seem like a priority when you’re still in school or when you have a six-figure job offer before you graduate, but the effects of the pandemic on the job market highlight how critical it can be to have access to cash.
When you’re able, set an emergency fund goal. As a law student, that’s tough. But $500–$1,000 will usually cover most emergencies for a person in your position. Once you’ve started your legal career, inventory the cash you have on hand in your checking and savings accounts, including any accounts where you can easily access your money without incurring fees or penalties. This shouldn’t include any of your retirement savings, if you’ve already begun building them.
Likewise, inventory all your debt so you’re clear on all your required monthly payments. See how many months you could get by with only your current cash on hand. If it’s less than six months, set a goal of saving the amount still needed in a specific timeframe, for example, within two years. Then start saving.
Avoid the credit card lifestyle Credit cards are a great way for you to purchase large items quickly, to cover emergencies, and to build credit. That’s all good.
However, credit cards aren’t a great way to fund a lifestyle above what your actual income can support. A 2019 report revealed that 36 percent of college students have credit card debt. In a time of employment and income uncertainty, large credit card bills can be crippling if you’re already trying to manage student debt that can be in the six-figure range.
Now is the time to start living within your means. Work to eliminate the habit of using your credit cards to pay for anything outside of an emergency or a purchase that’s easier with a credit card, such as a hotel stay.
If you’re a chronic credit card user, this can take some time. Make a goal to decrease your use over a specific amount of time—six months, for example. This will likely take creating a spending plan.
Stick to a spending plan
Speaking of spending plans, it’s important to note that budgeting is typically the first recommendation for financial wellness. But it’s also easily overlooked— and it’s especially important for law students using student loans to cover many of their living expenses.
According to Thomas Stanley and William Danko, authors of The Millionaire Next Door, the one thing most millionaires have in common is having a budget and sticking to it.
Sounds simple, but sometimes the simplest things are tough to achieve.
Developing a spending plan takes time and a level of honesty with yourself; you need to consider your previous financial behavior as well as your future expected spending. During a time of unexpected unemployment for recent law school grads, it will be important to cut where you can to minimize the money that needs to leave your household each month.
To begin making that workable spending plan, consider what services and subscriptions you don’t absolutely need. This is a good practice now and long after the effects of the pandemic have waned. Using apps like Mint or You Need a Budget can help you develop a workable spending plan for your needs—and to stick to it.
Keep in mind that your spending plan should be flexible. If you overspend in one area, reduce spending in another area that month. If you find you’re overspending every month, reevaluate the plan and adjust it for more realistic monthly spending.
Mind your debt-to-income ratio
Financial experts recommend you keep your debt-to-income ratio under 36 percent to keep your debt manageable.
You can calculate that ratio by adding up all your monthly debt payments and dividing them by your monthly income. With income uncertainty for many recent law graduates, assessing your debt-to-income ratio is more important than ever.
Facing a shortage of income with a high debt-to-income ratio can become problematic quickly. But no matter your income level, a high ratio can cause undue stress. If you’re ever faced with a job loss, high debt payments can create a difficult situation. Consider how you can prioritize paying down your debt so that if you do find yourself without a job in the future, your debt payments won’t become a problem.
If your debt-to-income ratio is higher than you’d like, take a look at your monthly income to determine if there’s any extra you could put toward loan or credit card payments. Prepaying loans cuts the amount of interest you pay overall and will shorten the time it takes to pay your loans in full.
Once you eliminate a monthly payment, your debt-to-income ratio will improve. Keep in mind that all federal student loans you borrowed for law school have no prepayment penalty.
Don’t lose money to scams
There have been internet fraud schemes since the dawn of the internet, but COVID-19 seems to have triggered a spike in scams. Remember that all your hard financial work can be undone if you don’t protect yourself from financial scams and identity fraud proactively.
Normally, you can review your credit report for free from all three credit reporting agencies (Experian, Equifax, and TransUnion once every 12 months at AnnualCreditReport.com. But currently, you can review your report for free weekly. That’s a good habit to establish while you’re in law school. Looking for new debt that’s suddenly popped up and that you’re unaware of will help you identify fraudulent activity.
If you’re concerned about financial fraud or scams, you can put an alert on your credit file with the credit reporting agencies. You’ll get notice any time new credit is applied for in your name, and you’ll have to approve the application.
This provides another layer of protection for your finances.
Similarly, you usually can put a large-transaction alert on your credit cards or checking accounts to alert you to any unexpected major purchases.
Protect what you’re building
It’s always smart to protect your assets, even while you’re in law school. If something has value to you, insure it— and that includes your health and life.
The common essential insurance coverages for individuals are health, property (home and car, for example) and, if you have a spouse or dependents, life. Once you’ve begun practicing law, you’ll also want to consider liability insurance.
The risk of not having adequate insurance coverage is that you could face significant medical bills, repair costs, or liability claims, or your family could face financial uncertainty in your absence.
Just keep in mind that you should insure only to protect against potentially catastrophic losses—ones that could derail your future—not small-risk exposures.
Here’s an example: If you’re in an auto accident with several cars and one is very expensive, plus there’s personal injury to others, you could be on the hook for big losses. Underinsuring for that could be catastrophic. However, insurance to cover an appliance? Not so much.
Take the time to research coverage you have and don’t have. You can always adjust your coverage. You’ll be thankful when an accident happens, and your insurance protects you, your valuables, or your legal practice.
Build a support system
Seek out vetted financial professionals who can help you with what you specifically need. Building this support system before financial trouble hits can make weathering storms much easier. It also means you won’t be scrambling to find support when you need it most.
Start finding a reliable:
- Certified Professional Accountant, or CPA, to assist with tax preparation or tax strategy questions
- Accredited Financial Counselor, or AFC, so you can feel confident in your financial strategy
- Credit counselor to help repair or build credit
- Student loan ombudsman with your student loan servicer or the U.S. Department of Education’s ombudsman if you ever have a dispute regarding your student loans
- A financial planner for a personalized plan to help you manage your budget and reach your financial goals
- Attorney to assist you with estate planning, will preparation, or any other legal process not in your field of expertise
Talk to those you trust to find recommendations, or use the resources above to start building your support system now.
Have a long game
The gig economy has become more popular in the last few years. Typically, people use these side hustles as sources for extra cash, but if your primary source of income disappears, falling back on these side hustles could provide financial protection.
Some schools don’t permit law students to work during the school year, and others discourage it. But it’s something to think about in a time of financial insecurity.
Don’t panic if it takes time—even years—to take action on all these suggestions.
The intention here is to encourage you to consider the financial lessons from the pandemic and to work toward safeguarding your financial future. The key is that you take steps toward achieving more financial security as you’re able.